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SAS Group Annual Report &
Sustainability Report 2006
The SAS Group 1
The SAS Group in brief 2
The business areas in brief 3
Results for the year 4
Important events 5
President’s comments 6
Business concept, vision, objectives & values 8 Strategies, management model & philosophy 9 Strategic focus areas of the Group 10 Strong brands in the Group’s markets 13 Market growth & competition 14
Alliances & partners 16
Framework for civil aviation 17
Flight safety 18
Security 19
Quality processes 20
The capital market
& Investor Relations 21
The share 22
Share data 23
External factors - cycles, trends & risks 24
Aircraft fleet 27
Financing, investment, liquidity &
capital employed 28
Ten-year financial overview 30
Group operational key figures 32
Business areas 33
SAS Scandinavian Airlines 33
SAS Braathens 36
Scandinavian Airlines Danmark 37 Scandinavian Airlines Sverige 38 Scandinavian Airlines International 39 SAS Business Opportunities 40 SAS Individually Branded Airlines 41 Spanair 44 Widerøe 45 Blue1 46 airBaltic 47
Estonian Air 48
SAS Aviation Services 49
SAS Ground Services 51
SAS Technical Services 52
SAS Cargo 53
SAS Flight Academy 54
Hotels 55
Annual Report 56
Report by the Board of Directors 56 The SAS Group
Statement of income, incl. comments 59 Summary statement of income 60 Balance sheet, incl. comments 61 Changes in shareholders’ equity 62 Cash flow statement, incl. comments 63 Accounting recognition and
measurement policies 64
Notes and supplemental information 68 Parent Company SAS AB, statement of income and balance sheet, cash flow statement, changes in shareholders’
equity and notes 83
Auditors’ Report 85
Corporate Governance 86
Corporate Governance Report 86
Chairman’s comments 91
Board of Directors & auditors 92
Group Management 93
Organization 94
Legal structure 94
Sustainability Report 95 The SAS Group Sustainability Report 2006 was examined by the Group’s external auditors.
Responsibility for sustainable development 96 Our world - our stakeholders 100 Sustainable development work 103
Results for the year 104
Corporate social responsibility 104 Environmental responsibility 106
Financial responsibility 109
Business areas 112
Assurance Report 117
Facts
Background facts on Star Alliance 118 Aircraft fleet & route network 120 Definitions & concepts Back flap
SAS retrospective Back cover
Reports
All reports are available in English and Swedish and can be ordered from:
SAS, SE-195 87 Stockholm, telephone +46 8 797 17 88, fax +46 8 797 51 10.
Reports can also be ordered on the Internet: www.sasgroup.net Direct further questions to SAS Group Investor Relations, Vice President - Head of SAS Group Investor Relations, Sture Stølen, telephone +46 8 797 14 51 or e-mail: investor.relations@sas.se
Group publications
The Code of Conduct, rules and guidelines for business ethics for the SAS Group in Danish, Norwegian, Swedish, English and Spanish and Civil Aviation in Scandinavia - value and importance in Danish, Swedish and English are available in printed or digital form at www.sasgroup.net
Financial calendar
• Annual General Shareholders’ Meeting, April 17, 2007
• Interim Report 1 (Jan.-Mar.), May 3, 2007
• Interim Report 2 (Jan.-Jun.), August 9, 2007
• Interim Report 3 (Jan.-Sep.), November 8, 2007
• Year-end Report 2007, February 2008
• Annual Report & Sustainability Report 2007, March, 2008 SAS Group Annual Report & Sustainability Report 2005 was published in March 2006.
The SAS Group’s monthly traffic & capacity data and most recently updated financial calendar are available under Investor Relations at www.sasgroup.net
Annual General Shareholders’ Meeting
The SAS Group’s Annual General Shareholders’ Meeting will be held on April 17 at 3:00 p.m. Venues:
• Copenhagen: Radisson SAS Falconer, Falkoner Allé 9
• Solna: The SAS Group head office, Frösundaviks Allé 1
• Oslo: Radisson SAS Plaza Hotel, Sonja Henies plass 3.
Company information
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Contents
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The SAS Group hasintroduced a new business model featuring one-way fares.
This was one reason the SAS Group flew 38.6 million passengers in 2006.
2
The SAS Group in brief
Rezidor Hotel Group * SAS Individually Branded Airlines
Spanair Widerøe Blue1 airBaltic
Strategic affiliated company: Estonian Air
SAS Aviation Services
SAS Ground Services SAS Technical Services SAS Cargo
SAS Flight Academy ** * The hotel business which was sold through an IPO on November 28, 2006, is reported as a discontinued operation. This also applies to other discontinued operations.
** Sold in February 2007.
SAS Scandinavian Airlines
Scandinavian Airlines Danmark SAS Braathens
Scandinavian Airlines Sverige Scandinavian Airlines International
Hotels
Definitions & concepts, see back flap.
SAS Group business structure
The SAS Group, the Nordic region’s largest listed airline and travel group, offers air transportation and airline-related services.
The Group is listed on the Stockholm, Oslo and Copenhagen stock exchanges through the parent company SAS AB. SAS Scandinavian Airlines, Spanair and Blue1 are members of the world’s largest global airline alliance - Star Alliance™. The Group also includes the airlines Widerøe and airBaltic as well as the partly owned airline Estonian Air and the business area SAS Aviation Services.
Summary statement of income
Group, MSEK 2006* 2005*
Revenue 60,777 55,501
EBITDAR 6,616 5,680
EBITAR margin 10.9% 10.2%
EBIT 1,273 677
Income before nonrecurring items 1,279 114
Income before tax, EBT 292 –246
Income before tax from continuing
and discontinued operations 4,936 418
Share, SEK 2006 2005
Earnings per share1 28.10 1.06
Market price at year-end 116.5 104.5
Dividend (proposed for 2006) 0.0 0.0
1Earnings per share for continuing and discontinued operations.
Key figures, Group
Key figures 2006 2005
CFROI 15% 13%
Debt/equity ratio 0.25 1.18
Adjusted debt/equity ratio 1.68 2.90
Equity/assets ratio 32% 21%
Financial net debt, MSEK 4,134 14,228
Investment, MSEK1 2,035 1,455
Airline operations 2006 2005
Number of passengers, 000 38,609 36,312
RPK, mill. 38,443 36,431
ASK, mill. 53,771 52,754
Passenger load factor, scheduled 71.5% 69.1%
Yield, SEK 1.15 1.10
Unit cost, SEK 0.75 0.74
Total number of aircraft 301 294
Number of daily departures, average 1,515 1,520
Number of destinations 164 147
Key figures, sustainability 2006 2005 Average number of employees1 26,554 26,727
Of which women 41% 42%
Of which men 59% 58%
Sick leave 6.1% 6.8%
Carbon dioxide (CO2), 000 tonnes 6,213 6,192 Nitrogen oxides (NOX), 000 tonnes 25.3 23.2
1Refers to continuing operations.
SAS Group Annual Report 2006 • The SAS Group in brief
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Earnings and degree of achievement of targets 2006 relative to the Group’s requirements over a business cycle
Improve- Income before Target ment nonrecurring items achiev- since Negative Positive ement 2005 SAS Braathens
Scandinavian Airlines
Danmark ✔
Scandinavian Airlines
Sverige ✔
Scandinavian Airlines
International ✔
Spanair ✔
Widerøe Blue1
airBaltic ✔
SAS Ground Services SAS Technical Services
SAS Cargo ✔
SAS Flight Academy Passengers carried (000)
10,000 20,000 30,000 40,000
2006 2005 2004 2003 2002 2001 Operating revenue MSEK
40,000 50,000 60,000 70,000 80,000
2006 2005 2004 2003 2002 2001
Income before nonrecurring items MSEK
–4,000 –3,000 –2,000 –1,000 0 1,000 2,000
2006 2005 2004 2003 2002 2001
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SAS Scandinavian Airlines Key figures 2006 2005
Revenue, MSEK 38,631 36,859
EBITDAR, MSEK 5,076 3,435
EBITDAR margin 13.1% 9.3%
Income before nonrecurring
items, MSEK 1,252 –374
Income before tax, MSEK 1,236 –39
Number of passengers, mill. 25.1 25.0 Average number of employees 7,5881 8,244 Carbon dioxide (CO2), 000 tonnes 4,069 4,245 Nitrogen oxides (NOX), 000 tonnes 17.3 16.0
Environmental index 71 72
1Of which women 53% and men 47%. The business area comprises the airlines SAS Braathens, Scandinavian Airlines Danmark, Scandinavian
Airlines Sverige and Scandinavian Airlines International, which operate flights to/from and within Denmark, Norway and Sweden. SAS Scandinavian Airlines International operates the Group’s intercontinental flights. The airlines carried 25.1 million passengers in 2006. The business area coordinates the Group’s sales resources in Scandinavia and internationally.
Main markets:Scandinavia, Europe, North America and Asia.
Competitorsare airlines that fly to/from and within Scandinavia. Rivals include Air Berlin, Air France/KLM, British Airways, Finnair Group, Norwegian, Ryanair and Sterling.
See also analysis of competitors, page 15.
Customers:Primarily frequent flyers in the business and leisure segments.
Return requirements:See each airline.
0 10 20 30 40
Norway Rest of
world Rest of Europe Denmark Sweden
Passenger revenue, geographic breakdown 34%
9%
20%
13%
24%
SAS Individually Branded Airlines
Key figures 2006 2005
Revenue, MSEK 17,592 14,352
EBITDAR, MSEK 2,126 1,920
EBITDAR margin 12.1% 13.4%
Income before nonrecurring
items, MSEK 241 264
Income before tax, MSEK 187 279
Number of passengers, mill. 13.5 11.3 Average number of employees 7,4021 6,464 Carbon dioxide (CO2), 000 tonnes 2,123 1,9282 Nitrogen oxides (NOX), 000 tonnes 8.0 7.1 Environmental index,
see each company
1Of which women 45% and men 55%.
2Including airBaltic.
The business area consists of the airlines Spanair, Widerøe, Blue1 and airBaltic, The airlines carried 13.5 million passengers in 2006. Spain’s second-largest airline, Spanair operates scheduled and charter flights.
Widerøe is the Nordic region’s leading regional carrier, and Blue1 is Finland’s fastest-growing airline in domestic and international service. airBaltic is Latvia’s and Lithuania’s largest airline. Also included in the business area is the strategic affiliated company Estonian Air, which flies to and from Tallinn.
Main markets:Spain, Norway, Finland and the Baltic states.
Competitorsinclude Air Europa, Easyjet, Finnair Group, Iberia, Ryanair, Vueling and network airlines in Europe.
See also analysis of competitors, page 15.
Customers:The airlines’ business models are tailored to their respective markets for frequent flyers in the business and leisure segments.
Return requirements:See each airline.
0 20 40 60
Spain Rest of
world Rest of Europe * Finland Norway
Passenger revenue, geographic breakdown
50%
11%
14%
9%
16%
* of which the Baltics 6%
SAS Aviation Services Key figures 2006 2005
Revenue, MSEK 14,746 14,964
EBITDA, MSEK –22 1,011
EBITDAR margin –0.1% 6.8%
Income before nonrecurring
items, MSEK –111 633
Income before tax, MSEK –527 502
No. of pass. handled, mill. 75.9 73.6
Flown tonnes, 000 294 287
Average number of employees 10,7421 11,122
Unsorted waste, tonnes 399 529
Energy consumption, GWh 198 193
1Of which women 28% and men 72%.
The business area consists of SAS Ground Services (SGS), SAS Technical Services (STS) and SAS Cargo.
SAS Flight Academy (SFA) was sold in February 2007. SGS and STS are leaders in their home markets in the areas of ground handling and technical aircraft maintenance. SAS Cargo operates the freight business and has a strong position in the Nordic region. SFA is a Nordic leader in training pilots and cabin crew.
Main markets:SGS: Scandinavia, STS: The Nordic and Baltic regions, and SAS Cargo: The Nordic region is the main market, but operations are global.
Competitors:SGS’s competitors include Penauille Servisair and Novia. Among STS’s competitors are SR Technics group, Iberia and Air France Industries. SAS Cargo’s rivals include British Airways World Cargo, DHL and TNT.
SFA’s competitors are CAE, Alteon and GECAT. See also analysis of competitors, page 15.
Customers:SGS’s and STS’s customers are primarily in the SAS Group; SAS Cargo’s customers are largely outside the SAS Group.
Return requirements:See each company.
External Internal
SGS STS SAS Cargo
Sales breakdown
0 20 40 60 80
100 83.8%
16.2%
82.5%
17.5%
1.5%
98.5%
SAS Group Annual Report 2006 • The business areas in brief
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The business areas in brief
4 SAS Group Annual Report 2006 • Results for the year
Results for the year
– Favorable economy and new business models, as well as effective cost and capacity control, resulted in improved earnings➔ The year’s revenue MSEK 60,777
•Operating revenue for the full year amounted to MSEK 60,777 (55,501), an increase of 9.5%. Operating revenue excludes the hotel business, which is reported as a discontinued operation.
➔ Earnings improvement MSEK 1,165
•Income before tax from continuing and dis- continued operations amounted to MSEK 4,936 (418).
•Nonrecurring items totaling MSEK 667 (413) were charged against full-year results, of which MSEK 337 (413) pertained to restructuring costs, MSEK 146 (0) to impairment losses and MSEK 184 (0) to other nonrecurring items.
•Rezidor Hotel Group was listed on the stock exchange on November 28, 2006. The capital gain on the sale amounted to MSEK 4,243.
•Income from discontinued operations amounted to MSEK 4,576 (577).
•Income before nonrecurring items amounted to MSEK 1,279 (114) for the period, an improve- ment of MSEK 1,165.
•CFROI for the twelve-month period January- December 2006 was 15% (13%).
➔ Good growth
•The number of passengers rose by 6.3% to 38.6 million.
•In 2006 the SAS Group’s passenger load factor improved by 2.4 percentage points, amounting to 71.5% (69.1%).
➔ Earnings per share SEK 28.10
•For the SAS Group, earnings per share for continuing and discontinued operations were SEK 28.10 (1.06).
•Earnings per share for continuing operations amounted to SEK 0.78 (–2.01) for the full year.
Equity per share amounted to SEK 99.49 (69.93).
➔ Dividend
•The Board of Directors proposes to the Annual General Shareholders’ Meeting that no dividend be paid to SAS AB’s shareholders for the 2006 fiscal year. This is motivated by the SAS Group's relatively weak financial position and cash flow, as a result of which, financial flexi- bility will be of major importance in managing future restruc- turing measures and investments.
➔ Efficiency measures
•Cost savings of SEK 2.5 billion are currently being implemented. At year-end, 79% of the savings has been put into effect.
➔ Improved sustainability
•2006 was the SAS Group’s best year for envi- ronmental performance, with the lowest fuel consumption per produced unit and the best environmental index.
•In more than half of Group companies, the employee index PULS showed improved results.
➔ Full-year 2007
•There are currently no indications of a slowdown in the economy or the airline market, but un- certainty remains regarding the strength of growth, the future competitive situation and the trend for jet fuel prices.
In 2007, continued favorable passenger growth is expected in most of the SAS Group’s markets. Growth is expected to be strongest in traffic to/from Europe, in the Baltic states and Spain. Competition is expected to remain intense in the markets in which the SAS Group is active.
New business models and other initiatives have strengthened the Group's competitive- ness and, in 2007, SAS Scandinavian Airlines will implement further improvements and in- novations in its commercial concepts.
The SAS Group has initiated a process,
“Strategy 2011,” aimed at defining the Group’s future approach. New efficiency and revenue measures will certainly be part of this plan.
Due to continued structural activities, future restructuring costs cannot be ruled out.
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➔ First quarter 2006
•The pilots at Scandinavian Airlines Danmark went on a wildcat strike, resulting in the can- cellation of nearly all flights from Copenhagen for three days. A shortage of pilots resulted in a large number of canceled flights at SAS Braathens.
•The Supreme Court of Norway overturned the decision of Eidsivating Court of Appeal in favor of SAS Ground Services in a lawsuit concerning employees’ rights in connection with the transfer from Braathens in 2002.
•The SAS Group completed the incorporation process and affected pilots were transferred from the SAS Consortium to Scandinavian Airlines Danmark and Scandinavian Airlines Sverige effective March 1, 2006.
•The European Commission conducted an unannounced inspection of SAS Cargo in Copenhagen on February 14 as part of an extensive investigation of suspected antitrust violations in the airfreight business. A similar investigation by U.S. authorities is under way.
•Blue1 opened ten new European destinations from Helsinki in March and April.
•At Spanair, certain revenue and expense items were incorrectly booked for 2002-2005.
➔ Second quarter 2006
•SAS Braathens concluded a new agreement with cabin crew after a three-day lawful conflict.
•At SAS AB’s Annual General Shareholders’
Meeting, the Board of Directors was reelected and Jens Erik Christensen replaced Lars Rebien Sørensen who declined reelection.
•SAS AB’s Annual General Shareholders’
Meeting resolved not to pay a dividend for the 2005 fiscal year.
•The President and CEO of the SAS Group, Jørgen Lindegaard, announced that he would leave the SAS Group.
•Scandinavian Airlines and the pilots’ unions signed an agreement that ensures unity regard- ing terms of employment, the seniority list and principal payroll and employment terms and conditions.
➔ Third quarter 2006
•SAS Scandinavian Airlines transported 7,900 passengers from Lebanon on evacuation missions on behalf of the Scandinavian gov- ernments.
•Executive Vice President Gunnar Reitan assumed the position of Acting President and CEO from August 1.
•SAS Braathens was found not guilty of abusing its dominant position on the Oslo-Haugesund route. The Norwegian Competition Authority concluded its investigation of the Oslo- Ålesund route without taking any action. SAS Braathens was also found not guilty of unlawfully access- ing data about Norwegian in the Amadeus reservation system. Both judgments are being appealed.
•The SAS Group signed a cooperation agree- ment with Reitan Servicehandel for the distri- bution of air tickets through the retail sector at about 2,400 stores in Scandinavia.
•The technical base for heavy maintenance in Stavanger/Sola was closed on September 1.
•Scandinavian Airlines International reported that the Stockholm-Beijing
route will open in March 2007.
•The SAS Group celebrated its 60th anniversary on Septem- ber 17.
➔ Fourth quarter 2006
•Spanair launched five new routes and four new destinations in October and is expanding its operations from Barcelona.
•The SAS Group reported a possible sale of SAS Flight Academy.
•Rezidor Hotel Group was listed on the stock exchange.
•Moody’s upgraded its credit rating outlook of SAS from negative to stable.
•The European Commission proposed intro- ducing an emission quota trading system.
➔ After January 1, 2007
•Mats Jansson assumed the position of Presi- dent and CEO on January 1, 2007.
•The Board of Directors of the SAS Group proposes to the Annual General Shareholders’
Meeting that no dividend be paid for the 2006 fiscal year.
•The SAS Group is changing the structure of its intercontinental operations, adding the Stock- holm-Beijing route and several frequencies to New York. The route to Shanghai is being closed down as of April 8, 2007. A new Stock- holm-Bangkok nonstop route will begin at the end of October.
•The SAS Group announced new products and services for its largest customer segment - frequent flyers.
•SAS Flight Academy was sold in February.
•The SAS Group will offer its customers the opportunity to purchase carbon offsets.
SAS Group Annual Report 2006 • Important events
Important events
6
2006 - a year of change
SAS Group Annual Report 2006 • President’s comments
A strong market combined with new business models, and effective cost and capacity control resulted in improved earnings.
Although the result reported for 2006 is a good sign, the level is too low to meet future investment needs.
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➔ After Jørgen Lindegaard’s departure, I was given the task of heading the SAS Group. It has been a challenging and very fruitful period. The year got off to a turbulent start with our difficult internal negotiations, which had an adverse im- pact on our earnings and delivery quality. Primar- ily during the late spring and to date, there has been a sharp increase in demand in most of the Group’s markets, which was a significant reason for the improvement in earnings. In addition, the introduction of new business models, effective cost control and efficient capacity adaptation re- sulted in considerable earnings improvements, primarily in the SAS Scandinavian Airlines business area. Income before nonrecurring items totaled MSEK 1,279, an improvement of MSEK 1,165. We are satisfied with the pace of improvement, but the level of earnings remains far from the returns that our shareholders are entitled to demand.
Growth was highly favorable in the Baltic states and Spain, but there was also significant growth in
the Norwegian market. The SAS Group is well- positioned in the growth markets through airBaltic and Spanair. In Norway, SAS Braathens stabilized its market position. Despite moderate growth, Scandinavian Airlines Sverige had the largest im- provement in earnings in percentage terms. The Group’s other airlines also enjoyed a favorable earnings trend, except for Blue1, which had major startup costs in connection with its expansion.
The cost-reducing measures at SAS Scandina- vian Airlines and SAS Aviation Services, totaling SEK 2.5 billion, continue. Significant efficiency- enhancement measures are also being implemen- ted by our other airlines. As Acting CEO, it has been my task to ensure that there has been a continued intense pace in the change processes.
I feel that we have succeeded well in this, both in the commercial area and in terms of the cost trend. The new business models have given us a considerably improved load factor that provides opportunities for efficient control of revenue.
During the year, a major step in the process to free up capital was implemented through the successful stock-exchange listing of the Rezidor Hotel Group. With this sale, the SAS Group in- creased its financial strength and we are now increasingly a streamlined airline group. It is my assessment that, through the work of recent years, we have created a more stable platform.
However, much work remains before we can achieve acceptable returns for our shareholders.
Stockholm, March 15, 2007 Gunnar Reitan Acting President and CEO August 1-December 31, 2006
➔ Following a two month period of knowledge gathering, I formally assumed the position of President and CEO on January 1, 2007. It feels incredibly positive and inspiring to have the op- portunity to head one of Europe’s largest and most respected airline groups. At the same time, it is an obligation because, in cooperation with my colleagues, my assignment and my mandate are
to develop the SAS Group financially and concep- tually. The aim is to enable the implementation of necessary investments, satisfy the owners’
demands for returns and preserve the SAS Group as an independent company.
By meeting and talking to more than 2,000 employees, conducting detailed interviews with some 100 managers, Board members and trade union representatives, I have gained an initial im- pression of the challenges that lie ahead. This process also forms the basis for the strategy work that has been commenced within the Group and which will culminate in a specific plan called
"Strategy 2011" that will be unveiled in May. The starting point for our strategy work is that we are progressing from a rescue or crisis phase to one of conceptually driven restructuring.
More clearly than ever, "Strategy 2011" will provide the answer to where we stand, what we will be, what we will offer, how we will behave and, last but not least, the results requirement or demand that we must achieve in order to fulfill future investments and the shareholders’ right to returns. In other words, we will chisel out hard and soft aspects of the plan. These involve everything from further cost-saving measures, brand posi- tioning, customer offering and measures for growth to a management model, but also consid- eration of climate issues and other key sustainabili- ty concerns, as well as basic cultural values.
What are my impressions and reflections after these first months?
First of all, SAS is a fine company that touches everyone. Competence and employee loyalty are Gunnar Reitan Acting President and CEO
as of August 1, 2006
Mats Jansson, President and CEO
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SAS Group Annual Report 2006 • President’s comments high. We have lots of loyal customers, but expecta-
tions are also great. The brand is strong, as is the market position, particularly in Scandinavia. The result reported for 2006 is a good sign, but the level is too low to meet the shareholders' return requirements and future investment needs. The gap in earnings amounts to about SEK 3 billion for achievement of a satisfactory level of return. To fill the gap, further efficiency measures are required, as well as further strengthening and clarification of our business concept. In other words, a combi- nation of cost and revenue measures.
A further reflection is that after completion of the necessary decentralization and incorpora- tion, we require a clear description of our various roles to ensure quality and speed in the imple- mentation of future improvement measures.
In conclusion, "Strategy 2011" will be no major revolution, rather a significant evolution with the principal aim of firmly establishing our future ap- proach and target scenario for our customers, employees and shareholders.
In 2007, continued favorable growth is ex- pected and there are currently no indications of a slowdown in the economy or the airline market.
However, uncertainty remains regarding the strength of growth, the future competitive situa- tion and the trend for jet fuel prices.
Stockholm, March 15, 2007 Mats Jansson President and CEO
The SAS Group’s strengths are a solid foundation for building on:
➔Brand position: trustworthy and reliable
➔Strong market position: Northern Europe
➔Extensive network with several hubs
➔Customer-oriented
➔Business structure with clear accountability
➔Proud, competent personnel
Impressions and reflections from meetings with customers, managers and staff
➔We need clearer and more distinct concepts for our business and leisure travelers
➔We must continue to streamline
➔We need to grow
➔We need a clearer description of our roles What will we offer?
➔ Organic growth
➔ Commercial concepts
➔ Degree of commercial coordination
➔ Allocating roles among the airlines
How will we behave?
➔ Management/philosophy and basic cultural values
➔ Employee strategy/ways of getting along with unions
➔ Communication strategy
How will we be managed?
➔ Management model: allocating roles between the Group and subsidiaries
➔ Implications for the organization
➔ Portfolio strategy
What are the results that we want?
➔ Definition of long-term financial targets
➔ Costs
➔ Operational efficiency
➔ Financial simulations Where do we stand?
➔ Markets and trends
➔ The SAS Group’s strengths, weakness- es, opportunities and threats (SWOT)
What will we be?
➔ Business concept
➔ Vision/target scenario
➔ Demands on ourselves
Questions addressed by “Strategy 2011”
The earnings requirement of SEK 4-4.5 billion will ensure the SAS Group’s returns to its shareholders and enable it to meet future investment needs and guarantee the Group’s independence.
“
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8 SAS Group Annual Report 2006 • Business concept, vision, objectives & values
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Business concept, vision, objectives & values
Strategy is being worked on in the Group and certain parts of the Group’s strategic plan are being reviewed and may be amended.
Called “Strategy 2011,” the new plan will be available on the SAS Group’s website in May.
Vision
The SAS Group’s primary mission is to serve Europe with air travel.
The preferred choice.
Values
The SAS Group’s overall financial objective is to create value for its owners.
Objectives
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The SAS Group’s overarching shared values are the basis of the Group’s actions vis-à-vis all stakeholders as well as individuals and groups.Profitability
•The Group’s financial target is a CFROI of at least 20% over a business cycle.
Products
•The SAS Group’s products should be easy to purchase and be perceived as a good value.
•Travel is to be smooth and tailored to the customer’s needs.
Market position
•SAS aims to be one of the leading airline groups in Europe.
Financial stability
•The SAS Group aims to maintain a level of indebtedness and equity/assets ratio that in the long run enable the Group to be per- ceived as an attractive borrower.
Flight safety
•Each year, flight safety is to be improved in line with the latest technical requirements and standards prevailing and available in the market.
Consideration
•We care about our customers and employees and acknowledge our social and environ- mental responsibilities.
Reliability
•Safe, trustworthy and consistent in word and deed.
Value creation
•A professional businesslike approach and innovation will create value for our owners.
Openness
•Open and honest management focused on clarity for all stakeholder groups.
Business concept
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SAS Group Annual Report 2006 • Strategies, management model & philosophy
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Strategies, management model & philosophy
Strategies and primary focus
Since 2001 the SAS Group has undergone con- siderable changes. New commercial concepts, Turnaround 2005, as well as the incorporation of operations have created a platform for the further enhancement of the Group’s strategies. In 2003 the Group defined four strategic focus areas. Re- cent company disposals, the listing of Rezidor Hotel Group, and the sale of SAS Flight Academy have refocused the Group on its core business.
The SAS Group enjoys a strong position in the European market and works continuously to bol- ster it further. This takes place within the frame- work of the four focus areas. See the chapter on the further development of the Group’s strategic focus areas on page 10.
The SAS Group’s target scenario is to be one of the leading players in the European airline in- dustry. The Group is also to be characterized by customer-friendliness, profitability, efficiency and a lower environmental impact.
The SAS Group’s management philosophy The basis of the SAS Group’s management phi- losophy is that accountability promotes efficien- cy, value-creation and motivation.
The Group will comprise clearly defined busi- nesses organized as subsidiaries within the Group, with full accountability. Each subsidiary is to be competitive in its business/region. Intra- group business relations are to be characterized by professionalism and based on commercially sound agreements. The Group sets standards for subsidiaries, guiding and coordinating in areas where synergies and coordination needs exist.
The culture of the SAS Group is to be character- ized by our shared values.
Market prices in internal business relations shall be determined by supplier companies being able to show their competitiveness by objectively presenting:
•Implemented benchmarks.
•Price level for external market.
•Tenders for outsourcing all or portions of services.
•Other information about the market and competitors.
Strategies for sustainability
•Sustainable development is achieved through an endeavor for economic growth, meeting en- vironmental standards and social responsibility.
•The Group shall optimize its resource use and systematically choose greener solutions.
•Employee motivation is fundamental to a successful enterprise.
Financial strategies are described on page 21.
SAS Group companies have developed strategies to reach the objectives set by the Group.
President and CEO: Appointed by the Board to lead the SAS Group &
Group Management.
Group Management: Formulates and develops overarching tasks, objectives, and strategies for the SAS Group and determines the companies’ tasks/roles and overarching objectives and strategies in a close dialog with the Group Board.
Corporate Functions: Support Group Management and the companies in reaching Group objectives. Functional responsibility within their areas.
Common Functions: Coordinate the subsidiaries within defined areas to achieve greater synergies and market power.
Subsidiary boards: The management of SAS Group subsidiaries takes place primarily through active board work.
Subsidiaries: Formulate and develop strategies and action plans to achieve objectives and break them down into different parts in their operations.
Subsidiaries Subsidiary boards Group Management
Corporate Functions Common Functions
President and CEO The SAS Group management model
According to the management model the SAS Group has chosen, the direct management of the subsidiaries in the SAS Group takes place primarily via ac- tive board work.
The SAS Group's strategic focus areas:
Commercial products
Optimized production system
Continued cost streamlining
Organizational development
10 SAS Group Annual Report 2006 • Strategic focus areas of the Group
➔
Commercial products
The SAS Group's airlines work continuously to develop and improve the business model with the aim of increasing customer value and com- petitiveness.
About 60-70% of SAS Group airlines’ cus- tomers fly on business. There is high price awareness among all customers, but customer surveys show that around two-thirds of business customers want more than the basic product offered by the new airlines or an economy class product. There is a willingness to pay for en- hanced service. Today about 50% of business passengers travel in Economy class.
The Group’s customer satisfaction surveys show that there are business travelers that are
dissatisfied with the Economy product and, accordingly, there is potential in designing an offering to satisfy these customers.
SAS Group shall offer a distinctly differentiated product compared with the new airlines. The Group flies to primary airports and is responsible for passengers and baggage during the entire journey. Customers save time using more flexible routines such as Internet check-in, allowing them to go directly to gate. The SAS Group has also in- troduced special “Fast Track” security controls for Business and Economy Extra travelers as a way of differentiating the product. For example, Spanair also offers a punctuality guarantee.
Since 2005, Group airlines have offered a new business model with demand-based one-way fares without complicated rules and restrictions.
SAS will expand its dialog with its largest cus- tomers, while improving its relations through new, customized corporate agreements with small and medium-sized enterprises.
In 2005 a new business model was introduced at SAS Scandinavian Airlines based on one-way fares and simpler rules for booking tickets. In the next phase, these products will be enhanced by tailoring this business model more to what the market wants (see page 12).
In autumn 2006, SAS Scandinavian Airlines launched a new, improved web site with a simpler booking dialog and clear price calendar. Pricing was also harmonized to simplify the process for passengers and to clarify price and product.
SAS Group airlines provide supplementary services that can easily be added to the journey.
Some examples are rebookable tickets for Busi- ness class travelers, Flight Shop, hotels, car rental, etc. Business Class offers comfort ameni- ties such as even more comfortable seats or sleeper seats on long flights, hot food on board, lounge access and vacant middle seats.
Production system optimization
New planning processes will further improve punctuality and regularity.
SAS Group airlines are also doing more to adjust capacity to profitability and demand. Un- profitable routes will be closed down, and greater use of dynamic traffic planning will ensure that capacity matches demand throughout the year.
For example, SAS Scandinavian Airlines has 20% lower capacity during the low-season months January-February than in September- October.
In 2007, intercontinental capacity will see a greater degree of seasonal adjustment to de- mand.
Strategic focus areas of the Group
Commercial products
•Positioning - differentiated products and fare structures
•New commercial relations
•Developing products
•New distribution platform
P
Since 2003 the Group has been working on four strategic focus areas: commercial products, production system optimization, continued cost streamlining, and organizational development.
After the journey Upon arrival
In the air At the airport
Before the journey
The SAS Group’s commercial initiative focuses on the entire travel chain
Efficiency throughout the travel chain is crucial. Everything from convenient booking to expedited security control, efficient check-in and being treated well on board are decisive factors for choosing an airline.
What does a trip from Stockholm to Paris cost?
Total price, new airlines: SEK 836 Total price, SAS Group: SEK 650
Example of a new carrier SAS Group Economy
SEK 0
SEK 0
Insurance SEK 0
SEK 56
SEK 125
Insurance SEK212
15 kg SEK 25
SEK 650
Card charge Card charge
incl. taxes
& fees
SEK 418
incl. taxes
& fees Ticket Ticket
20 kg totally
With the new carriers it is often the case that in addition to the fare, passengers have to pay payment card charges, baggage charges etc. Flights from secondary air- ports often result in longer total travel times.
The price example is based on information on airline websites on March 12, 2007.
Production system optimization
•Ensure high- quality deliveries
•Dynamic
traffic planning
•Continue capacity adjustments
C
Cost adaptations
Lower unit costs require higher productivity, market compensation levels, more seats in aircraft and lower handling and distribution costs.
The SAS Group continuously compares cost levels in each unit to ensure competitiveness.
The need for new efficiency-enhancement measures is being evaluated within the frame- work of the “Strategy 2011” program. Increasing efficiency is an ongoing feature of all of the Group’s units.
SAS Scandinavian Airlines and the companies in SAS Aviation Services are currently carrying out cost-cutting measures corresponding to SEK 2.5 billion for 2006-2007. These measures include streamlining sales operations, ground services, technical maintenance, distribution, and the administration, as well as higher produc- tivity and competitive terms for employees.
The breakdown of the SEK 2.5 billion is cur- rently MSEK 600 for productivity, approximately MSEK 900 for efficiency enhancements at SGS and STS, and approximately MSEK 1,000 for ad- ministration and sales and other costs. By the end of 2006, measures corresponding to 79%
of the SEK 2.5 billion had been implemented.
Spanair is working continuously to improve efficiency and further reduce unit costs. In all, Spanair is to implement efficiency enhance- ments of around MEUR 200 from the level of 2005 to 2009. In this connection, the airline concluded a four-year agreement with flight staff that makes possible higher productivity along with new, competitive pay scales. Widerøe iden- tified cost measures of approximately MSEK 200 aimed at reducing unit costs.
All companies will increase the degree of flexibility in the cost base, which will be secured through changed crew agreements, aircraft leas- ing, purchasing agreements, etc.
The earnings effect from the cost program in 2006 amounted to MSEK 1,000. At the same time, the earnings effect in 2006 from Turn- around 2005 is around MSEK 1,600.
Organizational development
To be able to continue a change process it is crucial to ensure the organization’s capacity to implement its plans. It is therefore essential to develop leadership, involve employees and de- velop human resources.
Evaluation, compensation and development of managers are to be directly linked to the strategic agenda and results attained. An ample supply of businesslike and strategic managers with focus on profitability is to be assured.
All employees are to see the connection be- tween their own efforts, the company’s commer- cial relations with the customer and the results attained. The ability to engage employees will weigh heavily in evaluations of managers.
There is a need to share expertise in a number of areas.
11
SAS Group Annual Report 2006 • Strategic focus areas of the Group Continued cost streamlining
• Complete decen-
tralization process • Flexible
cost base
• Local cost programs
Organizational development
• Strong
leadership
• Sharing
expertise
• Greater employee involvement
Ground &
Technical
Administration/
sales and other flight-related
costs 1,000
900 Productivity 600
Cost savings of SEK 2.5 billion, 2006-2007 MSEK
79%
implemented Dec 2006
Underlying unit cost, 2006
% (change over previous year)
–6 –4 –2 0 2 4 6
Under- lying unit cost Capacity adjustment Jet
fuel cost Currency-
adjusted unit cost Currency
effects Unit cost Cost-cutting measures corre-
sponding to SEK 2.5 billion are currently being carried out in SAS Scandinavian Airlines, SAS Technical Services, and SAS Ground Services. At year- end, MSEK 1,975 or 79% of the measures were imple- mented.
Adjusted for capacity adapta- tion (using dynamic traffic planning), currency effects, and sharply higher jet fuel prices, SAS Scandinavian Airlines’ unit cost fell marginally in 2006. The reduction occur- red despite pay inflation and other inflationary effects in operations.
